Define each of the following terms:
- a. Operating plan; financial plan
- b. Spontaneous liabilities; profit margin; payout ratio
- c. Additional funds needed (AFN); AFN equation; capital intensity ratio; self-supporting growth rate
- d.
Forecasted financial statement approach using percentage of sales - e. Excess capacity; lumpy assets; economies of scale
- f. Full capacity sales; target fixed assets to sales ratio; required level of fixed assets
a)
To discuss: Operating plan and financial plan.
Explanation of Solution
Operating plan is a short-term, highly detailed plan that is formulated by management of the company to achieve tactical objectives.
Financial plan is plan that identifies revenues and expenses. It defines specific goals like budgeting, cost associated with operations and sales projections.
b)
To discuss: Spontaneous liabilities, profit margin and pay-out ratio.
Explanation of Solution
Spontaneous liabilities are the liabilities which are resulted from purchasing of goods and services on credit basis and incur the obligation to pay for those goods offerings at some time within the future.
Profit margin is the ratio of profit after taxes to cost-of-sales, expressed in terms as a percentage. It is one of the measures of the profitability of a firm, and acts as an indicator to its cost structure.
Pay-out ratio is a taxable payment declared through a company’s board of directors and given to its shareholders out of the company’s current or retained earnings, usually quarterly.
c)
To discuss: Additional funds needed, AFN equation, capital intensity ratio and self-supporting growth rate.
Explanation of Solution
Additional funds needed (AFN) are those funds required from external sources to expand its assets to aid a sales growth. A sales increase will generally require an increase in assets. However, some of this growth is generally offset with a spontaneous growth in liabilities as well as by way of earnings retained in the firm.
AFN equation is as follows,
Capital intensity ratio is the amount required which means capital required per dollar of revenue and sales.
Self-supporting growth is the rate of growth that an entity can achieve with its own, not required to raise any external finance.
d)
To discuss: Forecasted financial statement approach by using percentage of sales.
Explanation of Solution
The forecasted financial statement approach using percent of sales develops a entire set of financial statements that may be used to calculate free cash flows, projected EPS, and various financial ratios. This method first forecast the sales, the required assets and then net income, dividends and retained earnings.
e)
To discuss: Excess capacity, lumpy assets and economies of scale.
Explanation of Solution
A firm has excess capacity when its sales can grow earlier than it ought to add fixed assets consisting of plant and equipment.
Lumpy assets are those assets that can’t be acquired smoothly, but require large, discrete additions.
Economies of scale occur the ratios are likely to change over the years as the size of the company increases. For example, retailers often want to maintain base stocks of various inventory items, even if current sales are pretty low. As sales expand, inventories might also grow less rapidly than sales, so the ratio of stock to sales declines.
f)
To discuss: Full capacity sales, target fixed assets to sales ratio and required level of fixed assets.
Explanation of Solution
Full capacity sales are calculated as actual sales divided by using the percentage of capacity at which fixed assets were operated. The target assets to sales ratio is calculated as actual fixed assets divided by way of full capacity sales.
The required level of income is calculated as the target fixed assets to sales ratio multiplied through the projected income (sales) level.
Want to see more full solutions like this?
Chapter 9 Solutions
Intermediate Financial Management (MindTap Course List)
- Which of the following does nor assign a value to a business opportunity using time-value measurement tools? A. internal rate of return (IRR) method B. net present value (NPV) C. discounted cash flow model D. payback period methodarrow_forwardDefine (a) return on investment, (b) risk, (c) financial flexibility, (d) liquidity, and (e) operating capability.arrow_forwardThe income statement comparison for Rush Delivery Company shows the income statement for the current and prior year. A. Determine the operating income (loss) (dollars) for each year. B. Determine the operating income (percentage) for each year. C. The company made a strategic decision to invest in additional assets in the current year. These amounts are provided. Using the total assets amounts as the investment base, calculate the ROI. Was the decision to invest additional assets in the company successful? Explain. D. Assuming an 8% cost of capital, calculate the RI for each year. Explain how this compares to your findings in part C.arrow_forward
- Please answer the following questions 1. _________________ is the discounted net future cash inflows divided by the initial cash outlay. a.Payback b.NRV c.Profitability Index d.IRR 2. __________________________ serves as a framework for measuring performance. a.NRV b.Payback c.Profitability Index d.Balanced Scorecard 3. Which of the following is a performance measures of the balanced scorecard: a.internal Business perspective b.all of the answers are correct c.financial Perspective d.customer perspectivearrow_forwardDefine each of the following terms:c. Additional funds needed (AFN); AFN equation; capital intensity ratio;self-supporting growth ratearrow_forwardTitle: Financial Metrics Self-Assessment Objective: To evaluate your understanding of financial metrics used to evaluate business performance. Instructions: Review the following financial metrics: Return on Investment (ROI) Residual Income Profit Margin Asset Turnover Minimum Required Income For each financial metric, answer the following questions: ● Whatisthedefinitionofthefinancialmetric? ● Howisitcalculated?arrow_forward
- What does each of the following definitions refer to: 1. The comparison of the expected future streams of earnings from a project, with the immediate and subsequent streams of expenditure. 2. All aspects of the administration of cash, accounts receivables, inventory, accounts payable, short term debt, accrued expenses, etc. 3. The specific mixture of long-term debt and equity the firm uses to finance its operations.arrow_forwardProfitability index. It is a ratio that provides information about the present value of net cash flows to the net investment. It provides a measure of the relative present value return for each dollar of initial investment. Discuss its usefulness. Should managers rely upon it? Consider its usefulness in a capital rationing situation (capital investment under conditions of financial restraint).arrow_forwardWhich of the following scenario shows the financial manager’s financing function? a. Prioritizing investments based on properly computed capital rationing method. b. Capital budgeting computation and decision with regards to the planned acquisition. c. Assessing and selecting a long-term and short-term financing tools that has a low cost. d. Monitoring trends in operating expenses for the purpose of budget allocation.arrow_forward
- d. Calculate the Efficiency ratio which includes the sales to total assets ratio, operating return on assets, return on assets, ROA Model, return on equity, and ROE Modelarrow_forward_______ ratios are used to measure the speed in which various assets are converted into sales or cash. A Debt (aka Leverage) B Efficiency (aka working capital) C Profitability C Coveragearrow_forwardWhat are the four types of cash flows MOST common in a capital budgeting valuation? Group of answer choices: A) Capital expenditure, net working capital, incremental free cash flows, after-tax salvage value B) Sales, cost of goods sold, interest expense and taxes C) Opportunity costs, externalities, synergies and sunk costs D) Net income, depreciation, flotation costs and dividendsarrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning